AN OVERVIEW OF PROVISIONS RELEVENT WITH RESPECT TO THE AUDIT OF CO-OPERATIVES.

Transcription

1 AN OVERVIEW OF PROVISIONS RELEVENT WITH RESPECT TO THE AUDIT OF CO-OPERATIVES. 1

2 In the context of audit, it is important to note that Co-op banks undergo mainly two types of examination of A/cs & compliances. This is a part of overall dual control for UCBs. A] Statutory Audit by the dept. auditor or C.A. appointed by Registrar or commissioner of their state Govts. (Multistate Co-op Bank can appoint statutory auditor on their own.) B] Inspection by R.B.I. (No fees are charged for this). True & Fair etc. is not the only thrust. The RBI has signed MOUs with almost all the State Govts. & the state level TAFCUBS are formed for unified action. 2

3 The various areas where these banks use services of C.A. s are: a) Concurrent audits of branches, b) Internal audit of branches / bank as a whole. c) Revenue audits, d) Investment audits of Bank, e) System audits, f) Tax audits, g) Stock audits (of borrowers), Credit audits, etc etc. 3

4 All these co-op banks are basically Co-op Societies, registered as such, under the State laws e.g. Maharashtra Co-op Societies Act If they are multi-state societies they are registered under Central Act viz. Multi-State Co-op Societies Act. The Central Registrar looks after the registration & functioning of these societies. Both these are registered as banks with, & licensed by RBI. So they can accept deposits from public / non-members but they can lend only to members. 4 Even today we have a few unlicensed Co-op banks.

5 Therefore the statutes & / or provisions, with reference to which the audit is to be carried out, will primarily include: a) Bye-Laws of the auditee co-op bank. b) Governing Societies law which can be, i) Co-op Societies Act of the concerned state & Rules etc thereunder, or ii) Multi State Co-op Societies Act & Rules etc thereunder. c) Banking Regulation Act 1949 (as applicable to co-op societies ) & Rules 1966 thereunder. 5

6 d) Circulars, notifications & orders etc issued by co-op Dept. of the concerned Govt. and by RBI. These are many, issued regularly & often updated. e) RBI Act. f) Tax Laws. Urban Banks Dept. (UBD) of RBI looks after the functioning, monitoring, inspection, etc. of co-op banks. 6

7 Some of the main provisions/ information w.r.t. audit of co-op banks are covered hereafter. This is NOT an exhaustive compilation of all the relevant provisions of the various laws applicable to UCBs and rules & various circulars thereunder. Important provisions of Mah. Co-op Soc. Act (MCS Act), Banking Regulation Act (B.R. Act), & imp. Circulars of RBI are briefly covered herein, in the form of an overview. 7

8 Section 81 of MCS Act expects Registrar to cause the audit of Urban Co-op Banks, District Cr. Co-op Banks. Presently the Registrar of Maharashtra is appointing C.A. firms to conduct statutory audit of Co-op Banks having deposits of more than 25 crores. The allotment is generally made to non-proprietory auditors i.e. to partnership firms. Empanelment for the same is done at the office of Registrar/ Commissioner at Pune. Since the allotment is decentralised. Even Co-op credit societies are allotted & even to proprietary firms. 8

9 The partner/ prop. of the auditor firm shall not be internal auditor or director of the bank. Undertaking to this effect is required, Audit is expected to be completed by 30 th June, generally. Auditor is expected to give the special report w.r.t. to serious irregularities or matters, if any, warranting civil/ criminal/ admin. action. Auditor firm is responsible for filing the F.I.R. if the matter so warrants. Auditor is responsible if he fails to report on misappropriations/ frauds/ shortcomings/ inconsistencies etc. in the a/cs, records or functioning of the auditee bank. 9

10 Provisions w.r.t. Audit Section 81(2) says that the audit us 81(1) specifically includes exam or verification of 09 items. i) Over dues of debts ii) Cash & Securities and valuation of Assets & Liabilities. iii) Loans are properly secured & terms are not prejudicial to interest of society. iv) Transactions presented only by book entries are not prejudicial to interest of society (e.g. Depreciation provisions, income accruals recorded ). 10

11 v) Whether loans are shown as deposits (if any). vi) Personal expenses, if any, debited to revenue A/c. vii) Expenses incurred on furtherance of object. viii) Proper use of government assistance, if any. ix) Proper carrying out the objects & obligations towards members. 11

12 Section 81(3) to 81(5A) gives various rights to the statutory auditor. These are: a) Access to record, assets of society & assets in custody of society. b) Require any officer/ employee/ member/ past member to furnish information w.r.t. transactions and working of society. c) Receive notice of AGM, attend the same and be heard there at. d) Impound the books and documents with permission of Registrar. 12

13 The statutory auditor has to submit audit memorandum u/s 81(5B), to society & to Registrar. Disclosures as required by the MCS Act and True & Fair view are to be reported upon. Forms of audit report are as prescribed by the Co-op Laws &/or by department. For e.g.form No.01 (General), 07 (Banking Specific), etc. The auditor has to allot a particular Grade to the auditee bank e.g. Grade A or B etc. The rating methodology is prescribed for this purpose. Rating methodology is applicable even to Co-op Credit Societies. 13

14 Form 1-> 14 Points :- Audit info, membership, shares, outside borrowings, meetings, rectification report, Audit Fees, Internal Audit, M.D. & Staff, Breaches, P & L, Cash Bank & Sec, Mov/ Imov Property, Discussion. Form 7-> 11 Points :- Depo, Fluid Resources, Borrowings, (Question Funds, Loans, Bills Bus, Invest., Exp., Branches, Answer & Internal Check, Management. Comments) 14

15 CAMELSC RATING weights C : Capital Adequacy 12% A : Asset Quality 20% M : Management 12% E : Earnings 16% L : Liquidity 12% S : System & Control 08% C : Co-operation 20% 100% Max 700 Marks Actual Weighted Conversion Above 75 is A, Above 60 is B, Above 50 is C, And Others are in D Similar Rating System ( Not Same) for Co-op Credit Societies. 15

16 Rule 69 of MCS Rules requires Auditor to submit Audit Memorandum stating therein whether: a) Final a/cs give required information in the manner so required & are True & Fair. b) He has obtained all info. & explanations necessary for audit. c) Proper books as required by Act, Rules & Bye Laws, are maintained. d) Final a/cs are in agreement with books & returns. If answers are negative / with qualification, reasons thereof be specified by the auditor. 16

17 Rule 69 of MCS Rules asks the auditor to submit particulars about: i) Transactions contrary to Act & Bye Laws. ii) Sums not brought into a/cs. iii) Material impropriety/ irregularity in expenditure or in realizations of dues. iv) Bad/ doubtful money/ property. v) Any other matter specified by Registrar. Rule 69 further says that the summary of audit memorandum be prepared by auditor & be read out in AGM. Audit memorandum is open for members. Registrar may direct to expunge any portion if objectionable/ not justified 17 by facts.

18 Section 82 says that the society has to report to the Registrar, about the actions taken to rectify defects & remedy the irregularities pointed by auditor. This is generally known as compliance report. This is to be in Form O (Rule 73) & it is to be submitted within 03 months. Auditor has to give his comments on compliance/ rectification report and serious/ uncomplied matters. Audit Fees depend on B/S size. 18

19 The other important provisions of MCS Act & Rules, which the auditor must know are as follows: 1) Sec 28: Restriction on Shareholding. Max 05 L & also not more than 1/5th of total capital. 2) Sec 29: Restriction on trf of Shares. Trf only after holding for 01 year & to existing/ new member who is being admitted. Acquire (Buy Back) from resigning members is permitted. But total repayment of Sh. Capital can t exceed 10% of Sh. Capital as in last B/S. 19

20 3) Sec 29 R/w Rule 21 Withdrawal of membership is subject to bye-laws. Holding Period 05 years, 3 m s Resign + 6 m s for repayment. Dues as borrower/ guarantor can be adjusted. 4) Neglected Rule Rule 23 Valuation of shares B.V/ F.V. whichever is less. 5) Sec 38: Register of Members. In Form I as per Rule 32. (List of members to be kept in Form J, as per Rule 33). 6) Sec 43: Restrictions on borrowing w.r.t. to Bye-Laws. 7) Sec 44: Loan only to members. No loan against the security of own shares. 20

21 8) Sec 49: Deduction from salary of borrower/ guarantors, in favour of the co-op bank. Very imp. tool of recovery for co-op banks. Agreement executed by borrowers/ guarantors is binding on their employers who have to deduct installments & send it to co-op bank. Auditor to see if such agreements are taken & acted upon. If the employer fails to deduct & remit he is personally liable to repay. Railway/ Mines/ Oilfields not covered. 9) Sec 66: Min 25% of yearly profit be trfd. To Resrv.Fund. 10) Sec 67: No more than 15% without prior sanction of Registrar. 21

22 11) Sec 68: Contribution of education fund to State Federal Society. 12) Sec 69: Max 20% of N.P can be used for Charitable Public purpose. (but only 01% in case of banks) 13) Sec 70: Investments only in prescribed modes. (But RBI directives for investments are more relevant for banks ). 14) Sec 71: P.F, if set up by bank, not to be used for bank s business. 22

23 15) Sec 73 (1AB) & Rule 58A : Managing Committee elected members to execute bond in Form M-20 within 15 days, on stamp paper Joint & Several responsibility for decisions taken by committee and such acts/ omissions which are detrimental to the interest of Society, as provided in Sec.73(1AB) 16) Rule 35: Registrar s sanction required if borrowings is more than 10 times of (Cap + R.F. + Bldg Fund losses). 23

24 17) Rule 49: Write off of Bad Loans:- Statutory auditor to first certify bad debts (irrecoverable loans) & then sanction of Gen. Body is required for w/off. Thereafter approval of the Registrar is required (if the last audit class is A or B & BDDR is adequate then Registrar s approval not required) 18) Rule 49A: Certain items to be deducted from G.P. e.g. prov. for bad & doubtful debts, Inv. Fluctuation Fund, retirement benefits, any other claims, depn. in value of securities held as investment. 24

25 19) Rule 50: Appro. of Profit for Charitable Purpose & Dividend Equalisation Fund etc (RBI restriction of 01% of N.P. for charitable purpose). 20) Rule 52: i) Div. Eq. Fund. A sum of not more than 02% of Share Capital can be tfd. to D.E.F. But cumulative bal. In DEF not to exceed 09% of Sh.Cap. ii) Div can t be at a rate exceeding the rate recommended by Committee (Board). iii) AGM can t increase the recommended rate but may theoretically reduce it. 25

26 Some of the imp. provisions of B. R. Act are as follows. (Sec 56 of B. R. Act:- Applicability of other sections for Co-op banks is as modified by Sec 56). Sec 6:- Forms of business a co-op bank may engage in are specified herein. Central Govt. can notify other activities. Hire Purchase & Equipment Leasing, insurance etc are notified. Sec 8:- Undertaking of trading activity in goods not allowed. But business specified u/s 6(1) (o) allows Trading in gold coins. 26

27 Sec 9:- Prohibition for holding any immovable property, except one which is required for it s own use, for more than 07 years. Sec 14A:- No floating charge can be created by co-op bank on it s property unless certified by RBI as not detrimental to the interest of depositors. Sec 18:- Maintenance of C.R.R. which is at present 06% for scheduled banks (in the form Balance with RBI A/c). No interest on this as per RBI Act. For other UCBs it is at present 03% (even cash & bal. with nationalised banks, IDBI, State Co-op., Dist. Co-op. etc. included). Scheduled Co-op banks 27 CRR Governed by Sec 42(1) of RBI Act.

28 Sec 20:- No loans against the security of own shares. Sec 20A:- No remission of debts due to the co-op bank, which are payable by present/ past directors, without approval of RBI. Also applies to firms/ Cos. in which they are partners/ director & to loans where they are guarantors. Sec 24 :- Maintenance of S.L.R. of not less than 25% of it s NDTL. RBI can extend this upto 40%. It is presently 25%. This SLR must be kept in approved securities. 28

29 Disclosures required as per RBI circular dt. 30/10/2002 :- Certain items are to be specifically disclosed as a part of final a/cs. There are around 15 such items. Some of them are as follows:- i) CRAR Capital to Risk Asset Ratio Min 09%. ii) Investments at book, face & mkt. value. iii) Advances against Real estate, const business & for housing. v) Advances against shares & debentures. vi) Advances to directors, their relatives, Co.s & firms in which they are interested. 29

30 vii) Gross & Net NPAS. viii) Profitability details e.g. interest income & non-interest income as a % to working fund, business per employee & profit per employee. 30

31 Some imp points as per circulars/directives of RBI or otherwise. Master Circulars on all imp subjects are issued on 1 st July. 1) Board of Directors: a) Min. 2 directors with suitable middle/ Sr. level banking experience or CA / Advocates with finance qualifications. b) No loans to directors / their relatives / their firms & Co.s. Now loan against FD & LIC policies allowed. 31

32 2) Call Money/ Notice Money Transactions: a) Not to lend to Non banking institutions e.g. insurance cos & mutual funds. They can lend only to scheduled com. banks, other co-op banks & PDs. b) Borrowing on any day not to exceed 02% of deposits at the end of last year. c) Call lending to a particular bank is to be within Per Party exposure limit for advances. 32

33 3) Capital Adequacy: a) Linking Share 2.5% for secured loans & 05% for unsecured loans. If the borrower is SSI he can take only 01% initially & bal 01.50% in next 02 years. However w.e.f. 15/11/10 well capitalised UCBS (CRAR > 12%) are exempted from this. b) CRAR of minimum 09% is required. Amounts of Assets in B/S & off B/S items are recalculated as per the risk weights. Total of these is Risk Asset amt. Capital fund shall be 09% of Risk Assets. Capital Fund consists of Tier I & Tier II capital. 33

34 4) Dividend (Controlled by St. Govt. & RBI): Only banks in Grade I can declare dividends on their own. Grade II banks can declare dividend only after RBI permission (Compliance on certain parameters are checked by RBI). Grade III & IV banks can t pay dividend. 5) Donations/ Charities: Normal donations made in a year can be max of 01% of profit. These, alongwith donations to National Funds/ Funds recognized by Cr/ State govt.s can t exceed 02% of N.P. 34

35 6) Investments: a) S.L.R 25% of NDTL shall be held in liquid assets viz cash, gold or approved securities. These are generally G Sec covered by Sec 20 of Indian Trust Act. b) Non SLR investments : i) No investments in shares/ debentures of pvt. Sector cos, generally. No inv. In mutual funds/ UTI, except Debt & Money Mkt. Mutual funds. No inv. In shares of AIFI. However inv. In A rated C.Ps & redeemable debentures & bonds permitted. 35

36 ii) Total Non SLR inv. should not exceed 10% of total deposits. iii) Deposit with other bank should not exceed 5% of the total deposits of the depositing Bank. iv) Total inter-bank deposits should not exceed 20 % of the total deposits of the depositing bank. *** Investments are to be classified in 03 categories viz. HTM, AFS & HFT. AFS & HFT are to marked to market. Losses are to be booked while shifting from one category to another. For HTM category Premiums paid are to be w/off. 36

37 7) Loan / Advances: The UCB has to strictly comply with the per party & per group exposure norms. Per party exposure should not exceed 15% of capital funds & per group exposure should not exceed 40% of the capital Funds. Capital Fund to include Tier I capital as well as Tier II capital. Credit exposure includes fund based (loans & CCs, etc.) & non-fund based (B.G.& L.C. etc). It also include the investment exposure on the particular borrower or group. 37

38 8) Ceiling for unsecured advances: a) Unsecured advances are expected to be guaranteed by the sureties. Per borrower limits are prescribed depending on it s CRAR is less than 9% or otherwise & the size of their D.T.L. b) Without surety advance can be only w.r.t. purchase of third party cheque etc. for max. 30 days. Even for this, the limits are prescribed. c) The aggregate of unsecured advances should not exceed 10% of the Total Assets of the bank. 38

39 IRAC Income Recognition & Asset Classification rules for UCBs are generally same as that for commercial banks. Some concessions are given to Tier I Banks, which are to be to be checked w.r.t. the a/c year under audit. For UCBs, generally, 90 days norms are applicable for identification of NPA. 39

40 N.P.A. w.r.t. Co-op. Banks If any loan / other credit facility given to a borrower becomes Non Performing Asset it has the following impacts. 1) That asset (advance) is to be classified as NPA & further into the sub category like Substandard/ Doubtful/ Lost etc. 2) Provisioning for amts of such NPA is required to be made at the prescribed percentage, depending on the classification of that advance. 3) Interest/ Income w.r.t. such NPA is not allowed to be taken to P & L A/c unless it is actually received. 4) The ratio of NPAs to total advances is an important factor for deciding the Grade/ Rank etc. of the bank. 40

41 When does the credit facility becomes NPA 1) The term loan becomes NPA if the int. &/or installment is overdue for more than 90 days. Thus if int/ installment of December 2010 is not recd., the loan generally be NPA on 31/03/ ) The cash credit/ overdraft becomes NPA if it is Out Of Order for more than 90 days. Out Of Order means a) Actual balance continuously more than sanctioned limit or b) Actual bal continuously more than drawing power or c) No credit (deposits) for a continuous period of 90 days. or d) Credits are lesser than interest debited in that period. 3) The Bill Discounting becomes NPA if the Bill Receivable (which is purchased & discounted by bank) is overdue for more than 90 days. 41

42 Agricultural Advances become NPA if a) Interest/ Installment is overdue for two crop seasons, in case of loan for short duration crop. b) Interest/ Installment overdue for one crop season, in case of loan for long duration crop. 42

43 Treatmentof NPA is borrower wise & not facility wise a) Mr. A has one O/D & three term loan a/cs with Bharat Bank. All these become NPA even if any one out of these 4 a/cs, become NPA. b) However Hindustan Bank need not classify a/cs of Mr. A as NPA only because they are NPA with Bharat Bank. This is true even if both these banks are in consortium for Mr. A. 43

44 A few exceptions to General Rules for a/c becoming NPA a) Advances guaranteed by Cr. Govt. b) Advances against FD/ NSC/ KVP/ LIP, if adequate margins are available. c) Staff loans, where interest is recoverable after recovery of principal & installments of principal are regular. d) Short term agri. Loans not repaid because repaying capacity affected by natural calamities & they are converted in loans of longer term. 44

45 Classification of Advances & Provisioning required thereon for Co-op Banks. Type Situation Provisioning Required Standard Not NPA & Not disclosing any problem. 0.25% to 01% Sub- NPA for less than or equal to 12 10% of Balance. Standard months. Doubtful NPA for more than 12 months 100% for unsecured i.e. part. a) In D category for 1 Year 20% b) In D category for 1 to 3 years 30% c) In D category for more than 3 50% to 100% years Lost Asset Advance which is non recoverable. 100% of Balance amt. minus salvage value of security if s.v.is not 45 negligible.

46 Income Recognition Type Accounting Entries Remark Standard Advances i) Loan/ C.C/ O.D A/c Dr To Interest (P&L) A/c ii) Cash/ Bank A/c Dr To Loan/ C.C/ O.D A/c iii) Interest (P&L) A/c Dr To O. I. R iv) Reverse the entry (iii) On Accrual Basis If & when Received If not received subsequently & A/c becomes NPA If interest is recd. ultimately 46

47 Type Entries Remark NPA I.R. A/c Dr To O. I. R A/c Reverse the above entry & pass the entry Cash/ Bank A/c Dr To Interest (P&L) A/c On accrual of interest If interest received subsequently. 47

48 In case of Co-op Cr. Societies, the IRAC & provisioning is as follows. (As Proposed) Type Situation Provisioning Required Standard Advances Over dues are NIL or less than 03 months NIL Sub- Standard NPA for less than or equal to 12 05% of Balance. months. Doubtful NPA for more than 12 months 50% on unsecured i.e. part. a) In D category for 2 years 10% b) In D category for 3 years 15% c) In D category for more than 20% 3 years Lost Asset Advance which is non recoverable. 100% of Balance amt. minus salvage value of security if s.v.is not 48 negligible.

49 Auditor to check that: 1) Interest on NPA a/c is not recognized as income in P&L a/c. 2) Rules of reversal of interest earlier recognized are followed w.r.t. fresh NPAs. 3) Proper provisioning is made. 49

50 Let us remember co-op credit is a very important mechanism for the much discussed inclusive growth. THANK YOU. 50